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Farming has not usually been considered a business. The diversity of the duties of the farmer, the area over which the operations of the farm extend and the complexity of the records required, combine in making difficult the organization of the details of farming into business form. The successful financial operation of a farm presents quite as complex problems and calls for at least as much business ability and judgment as is required in operating a store with the same investment. Farming, therefore, should be considered as a business, and the man who can produce his crops and products at the lowest cost and sell them at the highest price, investing the proceeds to the best advantage, should be considered the best farm manager. The man who knows the details of the cost of production and operation, and whose records show the profitable and unprofitable lines of production, thus enabling him to eliminate those that do not yield a profit, may be counted as the best business man.
A farmer should know the elements of soil fertility. He must understand the principles of the movement of soil water, and the action of soil bacteria. He should understand the nature of plant growth and be familiear with varieties and species of plants and with the effect of one crop on the crop following. He must also be familiar with animals and their habits and know how to feed and care for them. In addition, he must know how to buy and sell to advantage, make contracts, and plan his buildings and his farm so as to necessitate a light expenditure for labor, also that he may distribute his labor to advantage over the various farm enterprises. And he should know how to keep accounts.
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The investment of money in land, buildings, and equipment demands careful consideration. It is possible to pay so much for a farm that it will be impossible to produce sufficient revenue to meet the expense of operation and to pay a normal rate of interest on the money invested. This is particularly true where low-priced products are produced. A farm may be highly productive but so located that it will be impossible to market the produce on a profit bearing basis. One should study closely the market facilities of the neighborhood and raise supplies which can be successfully marketed locally, or which can be transported to a market
that pays well for such produce. Unless the produce of the farm is well related to the market, the farm is likely to be operated at a loss.
It is a mistake for one to invest all of his capital in the real estate itself. Sufficient capital should be reserved for operating the farm. The hunger for land has induced many farmers to buy more land that they can equip and operate well. Such farmers are said to be land poor. They would secure greater profit from a medium sized farm, well tilled and managed, than from a large one which is insufficiently equipped and poorly operated. Rarely should more than 50 or 60 per cent of the capital be tied up in the land. The size of the farm and the amount of equipment are closely related to the possible profits. A farm of forty or eighty acres devoted to diversified crops and live stock, cannot be so economically equipped per acre as a larger farm. The investment per acre in machinery will be higher as the cost will be spread over fewer acres than the machinery has capacity to handle. Investment in other equipment will also be correspondingly high. Often the labor on such a farm is not fully employed and loss results from inactivity of labor and equipment. A medium to large sized farm, when well organized, fully equipped, and with sufficient capital reserved to operate it well, will pay a much better labor income than a small farm.
Investments in machinery are worthy of quite as much consideration as investments in land. Machinery is looked upon as one of the means of reducing the cost of production. The wise use of machinery saves time and labor and enables the farmer to handle large acreages. In this light, the use of ample machinery is wise. The fact remains, however, that investments in machinery are often poorly made and that many farmers are embarrassed by debts for machinery. Frequently, farmers purchase machinery because it is fashionable or because a
neighbor has it, rather than because carefully made calculations show that a certain machine can be used profitably.
A safe rule is to buy no machine until carefully made calculations show that the cost of production of a certain crop or product will be reduced sufficiently by the purchase to cover the cost of the machine. That machinery investments can be studied from a business standpoint is quite plain. The following example, showing the relative cost of cutting corn with a machine versus cutting by hand, will illustrate:
The original cost of a corn binder is $125. The annual depreciation, as shown by statistical records covering ten years' work with farmers in Minnesota, is $12.50. The interest on the investment at the average value of the binder throughout its life will be $4.12. Repairs, shelter, and insurance will cost $2 annually. The total annual cost for the use of the binder, therefore, will be $18.62. If only twenty acres of corn are grown each year, the annual cost an acre for the corn binder will be $.93. The cost of cutting corn would be as follows:
[Chart: Cost of Harvesting Corn with Machine]
[Chart: Cost of Harvesting Corn by Hand]
It will be noted that a twenty-acre corn field can be more economically harvested by hand where labor is available. On a ten-acre field, the difference in expense would be still greater in favor of the hand harvesting, as the cost of machinery per acre would be doubled. The scarcity of labor, however,
and the necessity of harvesting corn quickly to save it from frost, would often warrant the expenditure for the machine, even though it does slightly raise the cost of harvesting per acre. The greater the acreage, the more useful the machine becomes in harvesting, and the less the expense per acre for machinery use.
Calculations similar to this should be made before purchasing a machine for any purpose. If it can be shown that the cost of performing the labor may be reduced by the machine, and that the labor can be performed in a more satisfactory and
[Illustration: Fig. 9.--Grain raising has been for many years the leading occupation of the American farmer.]
efficient manner with the use of it, then the purchase may be warranted. In many cases, however, calculation will show that the purchase is not warranted and that it would be better to hire labor and rent the machine, or to buy in partnership with some one else.
Another factor that should receive consideration is the cost of motive power in use on the farm. Horses usually furnish the farm motive power, though tractors are used to advantage in some cases. Auto trucks and automobiles can often be used to advantage in marketing dairy, fruit and garden products and the cost of using them, when it can be ascertained, should be compared with the cost
[Illustration: Fig. 10.--A barn that cost over $20,000. Such buildings throw a heavy interest charge on the farm and raise the cost of shelter for livestock to an unnecessary figure.]
must be fed and cared for during this time. The money invested in them would be drawing interest if invested somewhere else. Farmers should reduce the horses kept to the number actually required to do the work, unless the surplus are colts growing in value as one of the market products of the farm. The work of a farm can often be lessened by adopting a good crop rotation and using such crops as do not demand large amounts of horse labor at the same time. In this way a farm of 160 to 240 acres can often be worked with four to six horses, whereas eight to ten are frequently kept. The
*Bulletin No. 117 Minnesota Experiment Station.
support of two or three extra horses per year would amount to $200 to $250 and is an item well worth saving.
Investment in buildings, fences, and other items of equipment should be considered in the same business-like way. A barn costing $4,000 and providing shelter for forty head of cattle would carry with it an annual cost of $440. This annual cost is made up from the interest on the investment, insurance, depreciation, paint, and repairs. It will be about 11 per cent on the total investment. If the same forty cattle could be housed in a barn
[Illustration: Fig. 11.--A small but comfortable barn, conveniently arranged, giving comfortable quarters for live stock at reasonable expense.]
costing $2000 the total annual cost would be only $220, charging the same interest and expense rates as in the first instance, and assuming that the rate of depreciation would be the same. While the $4000 barn would undoubtedly be a better barn, it would not add to the production of the cows housed, unless it was much more comfortable. It would not add to the net profit from the investment unless the labor of doing the chores and caring for the cows would be considerably reduced by greater convenience. The cost of horse barns, swine barns, and other buildings can be similarly calculated. One should not erect a building unless it is going to add to the efficiency
of the live stock, shelter hay or machinery, or lessen the labor of doing the chores. It is wiser to invest money in drainage or in better tillage of the soil, than to invest it in buildings that shelter unproductive stock, or that add nothing to the earning power of the farm.*
The employment, organization and direction of labor demands considerable study. The value of a good farm manager lies quite as much in his abilitiy so to select and direct labor as to yield a profit, as it does in his ability to drive a good bargain or sell his crops well. The only reason for employing labor is to increase the product and consequent profit. If a farmer can, by employing a man eight months in the year at $40 per month, increase the product of his farm by $500, he will be warranted in employing the labor. If, however, the $320 invested in labor should yield an increase of only $200 in the products of the farm, employment would be at a loss.
Three primary factors are necessary in agricultural production. These are capital, land, and labor. The adjustment of these three factors is an important part of the business of the farm owner or manager, and determines largely the profits that may be made from the individual farm.
Capital, as commonly understood, includes the money value represented in the investment of the farm property, no matter what the form may be. Implements, live stock, teams, buildings, and othe rarticles of equipment, ar each a part of the capital of the farm. Cash for operating is also included.
*Good buildings and fences and a well kept farm often help in attracting customers for stock, seed grain or other products. As an advertisement they may increase the earning power of the farm indirectly. The satisfaction of owning good buildings and their influence in keeping the young folks on the farm or in enabling one to keep hired help should also be considered. The reputation of a farm in this respect may become a business asset.
Land represents the larger part of capital on most farms, and demands special consideration because the amount of land available for agricultural purposes is limited. Farmers have for this reason, regarded it wise to secure large quantities in localities where it was cheap, anticipating a rise in value. Location and demand for land in particular sections has led to much speculation, and land values fluctuate frequently.
The proportionate investment in each of the three forms,--circulating capital, land, and labor--bears a vital relation to the profits possible from the farm, and must be given the most careful consideration by the person who is buying and equipping a farm.
There are two forms of capital in common use. They are known as fixed or invested capital, and circulating or working capital. The fixed capital properly includes all forms of permanent equipment, such as investment in land, buildings, implements, teams, and other articles that are used continuously. In land it includes the natural value and the value of the improvements that have been made upon it. Picking stones from a rough section of land adds to its value and increases the capital invested. Clearing trees from the land has the same effect. Wells, drainage, roads, fences, and other forms of improvement which are permanent and which become part of the land, also add to the natural value and become a part of the fixed capital.
Buildings also are looked upon as part of the fixed capital. Strictly speaking, only those buildings which add to the producing power of the farm should be included in the capital invested in the farm. The dwelling house, while commonly added to the investment in the farm, is really intended for the personal use of the farmer and his family. Except in so far as it shelters the help employed on the farm, it can add but little to the returns from it. So far as making a statement of the business of the farm is concerned, it would be better were the farm-house inventoried separately from the other buildings and regarded as a personal expense to the farmer,
just as the house of the banker in the city is separated from the business of the bank. All other buildings including silos, corn cribs, granaries, and buildings for sheltering the stock and necessary in conducting the farm business, should be included in the inventoried capital of the farm.
Equipment in the way of teams for work purposes; implements; live stock, such as cows, brood sows, sheep and poultry, that are kept for live stock products, are all a part of the permanent equipment, since they are permanently employed and if sold are replaced by other animals for the same purpose.
The circulating or working capital, includes such items of equipment as are frequently changing. Seed grain, household and farm supplies that are immediately used or marketed, live stock, such as fattening steers, and money for hired labor, are examples of circulating capital. The classificiation intends tha the term "circulating capital" shall include only those items that are used once and disappear. If sold for cash, the cash may be invested in other forms of working capital which in turn disappear. Needless to say, the amount of working or circulating capital varies greatly in accordance with the type of business done, with the market, and with the tastes of the farmer. No rule can be given for the exact adjustment of capital for these reasons.
It is a common experience that the production on a farm is limited by the minimum amount of the one deficient factor. Difficulty is experienced in securing profitable production on a limited land area. In such a case, labor will not be fully employed or the equipment cannot be used effectively. On the other hand, a large land area and large equipment cannot be used to advantage without a plentiful supply of labor. Again, neither land nor labor can be used to the best advantage if the equipment is inadequate. It therefore stands to reason that these three factors must be carefully considered and proportioned in accordance with the needs of the business.
In purchasing and organizing a farm with limited capital, it is believed best to make the investment in about the following proportions:
45% for land investment
20% in buildings, provided they are to shelter productive live stock or market products;
22% in work animals and live stock;
8% in implements and tools;
5% reserved as working capital.
In buying a farm and equipping it with new machinery, the land investment will run lower than above indicated and the implements and tools investment will run higher. The machinery, however, will depreciate in value while the land is more likely to increase in value. As the farm becomes older and the land is improved, the proportion of investments will gradually change. On old farms near city markets, the machinery investment may become comparatively insignificant. The proportionate investment will necessarily vary with the type of farming followed. In the highly intensified forms of farming much more will be invested in live stock. H. W. Mumford [p. 172 ff.], in Bailey's Cyclopedia of Agriculture, gives a table showing the investment on a live stock farm in Illinois, from which it is calculated that there is invested in land and buildings, 60 per cent; in machinery, 4 per cent; in live stock, including horses, 30 per cent; and in labor, 5 per cent.
Have the pupils take inventories of their fathers' farms, providing a form similar to the following. The inventory may be taken on the regular weekly holiday. Prices should be checked over by the proprietor of the farm and brought to class for discussion and completion. The teacher should, if possible, go with the class to some farm and take an inventory, with the help of the proprietor, before starting the class members on their individual work. Allowing for any withdrawals of or additions to capital, the difference between the totals of two successive inventories will be the gain.
[Example of Inventory Form]
Notes Payable and Notes Receivable are not included as they are not related to the proportion of investment. They will be discussed in Chapter XVI on Farm Records.
Have the pupils find the total investment and the per cent of the capital invested in each of the forms of equipment used in classifying the inventory.
Have the pupils learn the cost of the barns on their fathers' farms. Ask them to calculate the interest at the prevailing rate. Determine the amount of depreciation on each barn at 5%. Learn the cost of insurance and repairs for the year. Include the interest, depreciation, insurance, and repairs in one sum called the "Annual Cost." Divide this annual cost by the number of animals sheltered and learn the cost of sheltering one head on each of the farms. Where different animals are kept, they may be reduced to a comparative basis by estimating the weight and considering 1000 pounds as a unit. Ten pigs weighing 100 pounds each would equal 1 cow or colt weighing 1000 pounds.
1. A farm which sells for $14,000 has a house worth $1400; a barn worth $1200; a machine shed worth $200; a silo worth $350, and a chicken house and other buildings worth $450. What per cent of the capital is invested in buildings?
2. If $2000 is necessary to equip the above farm of 160 acres what must be the gain per acre in order to pay 6% on the capital invested and allow the owner a labor income of $450?
3. A man wishes to build a barn to house 6 horses and 15 cows, and he decides that $3.00 per head per year should be allowed for interest on the money invested in the barn. Money bears 6% interest. How much should the barn cost? If insurance on the building costs 1/2% and depreciation on the building is 5%, what is the total barn cost per animal for each year?
4. If the proper ratio for investment in a farm is 45% for land; 20% for buildings; 22% in work animals and live stock; 8% in implements and tools; 5% in working capital--what should be the amount invested in the various divisions given if the bare land is worth $4500?
5. A man wishes to go into live stock farming and purchases a herd of 30 Shorthorn cattle for $3000, 4 mares for $1000, 10 brood sows for $400 and poultry $100. According to the records of an Illinois farm, the investment should be as follows: Land and buildings 60%, machinery 4%; live stock 30%, and cash for labor 5%. What should be the amounts invested in the various other forms of equipment on this farm?
6. A farm of 125 acres can be bought for $12,500. It can be rented for $5 per acre. The insurance is $20 per year; taxes $50; repairs $50. The increase in valuation of land offsets the depreciation in buildings. What per cent would be received on the investment by the owner?
7. A man can increase his corn yield 5 bushels per acre by hiring a man for 3 months and 3 bushels more by hiring a second man for the same
length of time. How many acres of corn should he have in both cases to pay the hired man if he pays $30 per month and board? (Board costs $12 per month.) The yield of corn without the extra care will be 40 bushels. The average price of corn is $.50 per bushel.
8. A barn costing $1850, shelters 16 cows, 10 head of young stock and 6 horses. Allowing 4 per cent for depreciation, 5 per cent for interest, 1/4 per cent for insurance and $20 for repairs and general expense, what is the cost per head for shelter?
9. A granary valued at $800, has capacity for storing 2000 bushels of wheat, 1000 bushels of oats and 500 of rye. If the interest rate is 6 per cent, depreciation 3 per cent, insurance 1/2 per cent, and repairs and general expense $12.50 a year, what is the cost per bushel for storage if the granary is filled to its full capacity?
10. A mower costs $45.00. Interest is charged at 6 per cent, depreciation at 8 per cent, shelter costs 75 cents and oil and reparis $2.30. If 15 acres of hay are cut, what is the cost per acre for the mower?
A man and team costing $3.50 a day can cut 7 acres a day with the above mower. A man with a scythe can be hired for $1.75 a day and can cut 1 1/4 acres a day. Which will be the cheaper way to have the hay cut?
How much is the difference per acre?
11. A farmer has 5 work horses. The cost for maintenance annually is, feed, $293.50; labor in caring for them, $70.30; shoeing and general expense, $4.90, and harness depreciation, $8.20. The horses were inventoried at $875.00 and depreciated in value, $35.00. Interest is charged on the investment at 6 per cent. The horse work 963 hours each during the year. What is the cost per hour for horse labor?
12. A farmer employed a man for eight months, beginning April 1st. He paid him $25.00 a month for th efirst three months, and $30.00 a month for five months. He also gave him board, which cost 43 cents a day, and kept a horse for him, at a cost o f$6.00 a month. The man worked 9 hours each working day, during 3 months, and 11 1/2 hours a day, for 5 months. What was the cost per hour for his labor?
Efficient Distribution of Farm Capital.--Wisconsin Experiment Station Bulletin 228, page 46.
Some Profitable and Unprofitable Farms in New Hampshire.--U.S. Department of Agriculture, B.P.I., Circular No. 128.
Equipment and Capital for Different Kinds of Farms.--Bailey's Cyclopedia of Agriculture, Vol. I, pages 162-202.
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